Duty free shops in slump without Chinese patrons

Shoppers check items at Lotte Duty Free's main branch in Myeong-dong, Seoul, Aug. 13. Korea Times file

Major duty free shops in Korea are facing significant losses that are unlikely to recover, as tourists in the country are embracing a new trend, shifting away from the once-popular shopping sector among foreigners.

Scenes of large crowds of foreign tourists, usually Chinese, shopping at duty free shops in Korea are increasingly being replaced by smaller groups or individual tourists from around the world visiting street shops. While travel-retail (TR) shops are recording declining sales, street shops for fashion, beauty, food and other souvenir-worthy goods are seeing soaring figures. The country’s big-four duty free companies are dealing with the impact by reducing costs, realizing that the situation will unlikely recover.

Lotte Duty Free has seen the largest loss among the big four. In the third quarter, it registered an operating loss of 46 billion won ($33 million). With a streak of money-losing quarters this year, the Lotte Hotel subsidiary’s accumulative deficit has mounted to over 92 billion won.

The company cited the economic slump in China leading to slowing consumption and reduced volume of Chinese tourists to Seoul — also known as “youke” — as key reasons behind its sluggish performance. In June, Lotte Duty Free launched its own austerity plan, downsizing the organization's payroll, slashing wages, reducing the floor size of its shops and promoting early retirement among employees.

“With our preemptive austerity plan now active, we hope to save money and stabilize our financial standing,” a company official said.

 

Shilla Duty Free saw the second-largest deficit in the third quarter among the four companies, with 39 billion won. After earning money in the previous two quarters this year, it has now slipped into a loss. Shinsegae Duty Free also recorded a deficit in the third quarter, amounting to 16 billion won, following profits in the earlier quarters. Hyundai Duty Free maintained a deficit for the third consecutive quarter this year, reaching a new low of 8 billion won.

Massive purchases by Chinese shoppers have been the largest contribution to duty free shops, but their numbers have been declining. According to the Korea Duty Free Shops Association, over 6 million foreigners used TR shops last year. The figure is less than a third of that from 2019 when it was over 20 million. However, this doesn’t mean tourists to Korea have been declining. Data shows that the number of foreigners visiting Seoul has nearly returned to pre-COVID-19 levels.

These tourists, instead of spending at duty free shops, are heading to street shops outside airports. Olive Young, the country’s largest beauty product franchise company under CJ Group, saw sales of 1.23 trillion won in the third quarter, a 23.4 percent jump from the previous year and the fifth month in a row seeing over-trillion quarterly sales. Net profit was 115 billion won, a 21.6 percent year-on-year increase during the same period.

Olive Young has become popular among foreigners as its stores are in the country’s key tourism hot spots like Myeong-dong and Hongdae. An increasing number of its stores have also gone through a facelift to become foreign-friendly by supporting multiple languages during shopping and providing a tax return service inside the shops.

Olive Young's latest store in Seongsu, Seoul, a day before its official opening, Nov. 22 / Yonhap

“Some of our shops have become specialized in K-beauty to target foreign tourists, helping them experience the global trend better,” an Olive Young official said. “We will keep supporting the country’s small and medium-sized enterprises that supply us with their beauty products so that their presence can become bigger outside the country.”

A Daishin Securities analyst said Monday that foreigners’ shopping sites are transitioning from duty free shops to health-and-beauty street shops such as Olive Young. He speculated that while TR shops are down, Olive Young’s sales this year will likely jump by 30 percent from the previous year.

“In the past, masses of people bought a huge load of goods at duty free shops. A transition is driving foreigners fast to come individually and check out each road shop and restaurant on the streets,” an official from the Korea Duty Free Shops Association said. “Duty free shops will have a hard time the following year as well, with less 'youke' expected to visit Seoul due to economic concerns in China.”

Amid the stagnant market, Lotte Duty Free encouraged employees to voluntarily resign in August as part of downsizing efforts — a move that Shinsegae also implemented in late November. Hotel Shilla, which operates Shilla Duty Free, issued exchangeable bonds for the first time worth 133 billion won in the second half of this year.